100% On Topic....
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Time bomb for home buyers
The Age, Natalie Craig
December 12, 2008
ABOUT 300,000 Australian households could face "negative equity" next year — owing more money to lenders than their house is worth — if prices fall by 10 per cent as predicted.
Modelling by RMIT's Housing and Urban Research Institute suggests that about 4 per cent of Australia's 8.5 million households could next year see the value of their property fall below what they owe on it.
"We could face a situation like the UK," said research head Professor Gavin Wood. "Rapid price falls there have meant a rapid increase in foreclosures … people who have already leveraged up to very high levels of debt now own nothing."
The median Melbourne house price fell 3.3 per cent to $435,000 in the three months to September, and economists from AMP, Morgan Stanley and Australian Property Monitors and are predicting price declines of at least 10 per cent in the next year.
British house prices have fallen about 15 per cent this year, and about a quarter of a million householders owe more than their home is worth.
In the United States, prices have fallen about 20 per cent since their peak in 2006, and about 12 million home owners are thought to be in negative equity.
Professor Wood said monitoring of the borrowing practices of about 20,000 Australians since 2001 showed that a large proportion were now at risk of negative equity.
A 10 per cent drop could push 300,000 households into negative equity, while a 15 per cent drop would affect 400,000.
That tallies with the latest data on mortgage stress from Fujitsu, which found about 363,000 were in "severe stress".
The western suburbs of Sydney and Melbourne's outer north have been identified as some of the areas most at risk of falling into negative equity.
Professor Wood said it was not just newer home buyers who had little equity, but also those who had taken advantage of more flexible redraw or "line-of-credit" facilities provided as part of their home loan.
"It's not just first home purchasers who have been taking out very high loans — it's also people who are already home owners, still youngish, but who have decided to tap into their housing wealth."
Contrary to marketing that suggested people extended their mortgages to fund luxury purchases such as holidays or a new car, many were drawing on their equity to cope with personal changes such as pregnancy, separation or job loss.
Professor Wood said many people were using the equity in their homes as a kind of "personal welfare", and could soon be forced to find other means of support.
"The sort of people we've identified at risk are younger people, families rather than singles, and also those who are recently separated or divorced.
"These are people who have been reliant on tapping their housing wealth to meet urgent spending needs. Those people are going to have to turn to more expensive forms of debt, or who could be forced to sell their homes."
Nicole Rich of the Consumer Action Law Centre said impending house price falls meant lenders should be discouraged from offering products that allowed people to "use their home like an ATM".
"It's not that they just make redraw available, they promote it," Ms Rich said. "Some people are going to take advantage of the maximum 90 per cent redraw when they're in difficulty.
"So by its nature it's a product that appeals to people that are struggling a bit."
While the Commonwealth Bank has removed its 100 per cent home loan, NAB will still lend 100 per cent of the purchase price of a property, less about 3 per cent mortgage insurance, to desirable borrowers.
Other borrowers with "equity loans" can draw on up to 90 per cent of the value of their home.
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I can't believe in the current economic climate that these Oz bank majors are still willing (or allowed) to potentially torch the finances of so many vulnerable Australians by offering tantalising "90-100% of purchase price" loans to "desirable" borrowers.
Are "desirable" borrowers the ones who will default the fastest so the bank can foreclose early and get mortgage over the now-trashed borrower's "asset" at a dirt cheap firesale price?